USD/MXN hovers above 18.0100 ahead of US Retail Sales

• USD/MXN retreats from a two-day winning streak ahead of US economic figures.
• US Dollar faces a challenge after the weaker preliminary US Michigan Consumer Sentiment Index.
• Banxico is expected to keep interest rates higher; contributing support for the Mexican Peso.

USD/MXN pulls back from the recent gains, trading lower around 18.0160 during the Asian session on Monday. The pair is facing challenges after the release weaker-than-expected preliminary Michigan Consumer Sentiment Index from the United States (US).

On Friday, the report for October showed a decline to 63.0 from the previous reading of 68.1, falling short of the expected figure of 67.4.

However, the USD/MXN pair gained in previous sessions possibly due to the shift in discussions about the trajectory of the US Federal Reserve's (Fed) monetary policy following the slew of robust US data during the last week, with US inflation surpassing expectations and initial jobless claims coming in lower than anticipated.

The US Dollar Index (DXY) trades slightly lower around 106.50 at the time of writing. However, investors seem to factor in the possibility of another Federal Reserve (Fed) rate hike to curb inflation.

Moreover, the recovery in US Treasury yields from the recent losses could provide support in underpinning the US Dollar (USD). The yields on US Treasury bonds recovers on Monday, with the 10-year US Treasury bond yield standing at 4.65%, up by 1.0%.

Additionally, the Greenback remains to benefit from the safe-haven flow amid the rising geopolitical tension between Israel and Palestine. An undisclosed source informed Reuters that there have been discussions between US officials and Israel regarding the potential visit of President Joe Biden to Israel. The invitation for this visit is reported to have come from Israeli Prime Minister Benjamin Netanyahu.

Market participants will likely watch the US Retail Sales (MoM) on Tuesday, with the figure expected to rise 0.2% in September, compared to the previous reading of 0.6%.

On the Mexican side, the recent release of Banxico's monetary policy minutes presents a hawkish outlook, with members indicating a reluctance to entertain the idea of a rate cut in the near term. The prevailing consensus among members reflects a belief that interest rates should be maintained at higher levels for an extended duration.

The main reason given for this position is the elevated prices noted in the services segment, identified as a significant factor influencing inflation data. This hawkish sentiment highlights a careful approach to monetary policy, with a priority on addressing inflationary pressures.

In September, the Bank of Mexico (Banxico) opted to keep interest rates steady at 11.25%. Additionally, the central bank revised its inflation projections for 2024 from 3.50% to 3.87%, exceeding the target range of 3% (plus or minus 1%). This adjustment in inflation forecasts suggests heightened concerns about the potential upward trajectory of prices, prompting a cautious stance from the central bank.